Item 7. Management’s Discussion and Analysis
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations provides a narrative of our financial performance and condition that should be read in conjunction with the accompanying consolidated financial statements.
The Company's fiscal year ends on the last Sunday of each calendar year. Most of our fiscal years have 52 weeks; however, we experience a 53rd week once every five to six years. Our discussion for fiscal year 2023, which ended on December 31, 2023, refers to a 53-week period with the fifty-third week occurring in the fourth quarter. Our discussion for fiscal years 2022 and 2021, which ended December 25, 2022 and December 26, 2021, refers to a 52-week period in each year. The following discussion comparing our results in 2023 and 2022 refers to the fifty-three weeks ended and fifty-two weeks ended, December 31, 2023 and December 25, 2022, respectively. For a discussion comparing our results from 2022 to 2021,
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refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 25, 2022, filed with the SEC on February 28, 2023.
Overview
Description of Business
Red Robin Gourmet Burgers, Inc., a Delaware corporation, together with its subsidiaries ("Red Robin," "we," "us," "our" or the "Company"), primarily operates, franchises, and develops casual dining restaurants with 506 locations in North America. As of December 31, 2023, the Company operated 415 Company-owned restaurants located in 39 states. The Company also had 91 franchised restaurants in 14 states and one Canadian province as of December 31, 2023. The Company operates its business as one operating and one reportable segment.
Our primary source of revenue is from the sale of food and beverages at Company-owned restaurants. We also earn revenue from royalties and fees from franchised restaurants.
Highlights for Fiscal 2023 Compared to Fiscal 2022
• Total revenues are $1.3 billion, an increase of $37.5 million.
◦ Comparable restaurant revenue (1) increased 1.6%.
◦ Comparable restaurant dine-in sales (2) increased 6.9%.
◦ The fifty-third week in 2023 contributed $24.5 million or 1.9% in restaurant revenue.
• Net loss is $21.2 million, a decrease of $57.7 million from a net loss of $78.9 million during 2022.
• Adjusted EBITDA (3) is $68.9 million, a $17.2 million increase.
• Completed two Sale-Leaseback transactions, generating net proceeds of $58.8 million and a gain, net of expenses of $29.4 million.
• Repaid $24.9 million of debt and repurchased $10.0 million of stock.
(1) Comparable restaurant revenue represents revenue from Company-owned restaurants that have operated five full quarters as of the 52 weeks ending December 24, 2023. The comparable restaurant base includes 406 restaurants out of the total 415 Company-owned restaurants.
(2) Comparable restaurant dine-in sales are calculated based on the Company’s point-of-sale sales data, which does not include adjustments for loyalty breakage.
(3) See below for a reconciliation of adjusted EBITDA, a non-GAAP measure, to Net loss.
Key Performance Indicators and Non-GAAP Financial Measures
Restaurant revenue, compared to the same period in the prior year, is presented in the table below:
(millions)
Restaurant revenue for the fifty-two weeks ended December 25, 2022
$ 1,230.2
Increase in restaurant revenue from the fifty-third week 24.5
Increase in comparable (1) restaurant revenue
18.8
Increase in non-comparable restaurant revenue 0.7
Total increase 44.1
Restaurant revenue for the fifty-three weeks ended December 31, 2023
$ 1,274.3
(1) Comparable restaurant revenue represents revenue from Company-owned restaurants that have operated five full quarters as of the 52 weeks ending December 24, 2023.
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Restaurant revenue and operating costs, and restaurant level operating profit for the period are detailed in the table below:
Fifty-Three Weeks Ended Fifty-Two Weeks Ended 2023 compared to 2022
(Dollars in millions) December 31, 2023 December 25, 2022 Increase/(Decrease)
Restaurant revenue $ 1,274.3 $ 1,230.2 3.6 %
Restaurant operating costs:
Cost of sales 309.0 306.5 0.8 %
Labor 473.5 440.6 7.5 %
Other operating 225.0 224.7 0.1 %
Occupancy 102.8 98.9 3.9 %
Total Restaurant Operating Costs $ 1,110.3 $ 1,070.6 12.4 %
Restaurant Level Operating Profit (1)
$ 164.0 $ 159.5 2.8 %
(1) Restaurant Level Operating Profit is a non-GAAP measure. See below for a reconciliation of Restaurant Level Operating Profit to Income from Operations and Income from Operations as a percentage of total revenues.
Fifty-Three Weeks Ended Fifty-Two Weeks Ended 2023 compared to 2022
(Dollars in millions) December 31, 2023 December 25, 2022 Increase/(Decrease)
Restaurant revenue $ 1,274.3 $ 1,230.2 3.6 %
Restaurant operating costs: (Percentage of Restaurant Revenue) (Basis Points)
Cost of sales 24.2 % 24.9 % (70)
Labor 37.2 35.8 140
Other operating 17.7 18.3 (60)
Occupancy 8.1 8.0 10
Total Restaurant Operating Costs 87.2 % 87.0 % 20
Restaurant Level Operating Profit 12.9 % 13.0 % (10)
Certain percentage and basis point amounts in the table above do not total due to rounding as well as restaurant operating costs being expressed as a percentage of restaurant revenue and not total revenues.
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The following table summarizes net loss and loss per diluted share, and adjusted loss per diluted share for the fifty-three weeks ended December 31, 2023 and fifty-two weeks ended December 25, 2022:
Fifty-Three Weeks Ended Fifty-Two Weeks Ended
(Dollars and shares in thousands, except per share amounts) December 31, 2023 December 25, 2022
Net loss as reported $ (21,228) $ (78,883)
Loss per share - diluted:
Net loss as reported $ (1.34) $ (4.98)
Gift card breakage (1)
0.03 (0.33)
Write-off of unamortized debt issuance costs (2)
— 0.11
Other charges (gains), net:
Asset impairment 0.58 2.43
Gain on sale of restaurant property, net of expenses (1.87) (0.58)
Severance and executive transition, net of $128 and $(3,299) in stock-based compensation
0.22 0.14
Other financing costs (3)
— 0.09
Restaurant closure costs, net 0.19 0.05
Closed corporate office costs, net of sublease income 0.03 0.03
Litigation contingencies 0.58 0.26
Asset disposal and other 0.11 0.03
Income tax effect 0.04 (0.58)
Adjusted loss per share - diluted $ (1.44) $ (3.32)
Weighted average shares outstanding
Basic 15,835 15,840
Diluted (4)
15,835 15,840
(1) During 2022, the Company re-evaluated the estimated redemption pattern related to gift cards. The impact of this change in estimate comprised $5.9 million included in Other revenue, partially offset by $0.6 million in gift card commission costs included in Selling, general, and administrative expenses on the Consolidated Statements of Operations.
(2) During 2022, the Company completed the refinancing of our Credit Facility and reported a non-cash charge associated with the write-off of unamortized debt issuance costs related to the remaining unamortized debt issuance costs.
(3) Other financing costs includes legal and other charges related to the refinancing of our Credit Facility in 2022.
(4) The impact of dilutive shares is excluded due to the reported net loss for all periods presented.
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The following table summarizes net loss, and EBITDA and adjusted EBITDA for the fifty-three weeks ended December 31, 2023 and fifty-two weeks ended December 25, 2022:
Fifty-Three Weeks Ended Fifty-Two Weeks Ended
December 31, 2023 December 25, 2022
Net loss as reported $ (21,228) $ (78,883)
Interest expense, net 25,796 19,882
Income tax provision (benefit) 310 747
Depreciation and amortization 66,190 76,245
EBITDA 71,068 17,991
Gift card breakage (1)
480 (5,246)
Other charges, net:
Asset impairment 9,130 38,534
Gain on sale of restaurant property (29,543) (9,204)
Severance and executive transition 3,419 2,280
Other financing costs (2)
— 1,462
Restaurant closure costs 3,062 828
Closed corporate office costs, net of sublease income 416 475
Litigation contingencies 9,140 4,148
Asset disposal and other 1,713 438
Adjusted EBITDA $ 68,885 $ 51,706
(1) During 2022, the Company re-evaluated the estimated redemption pattern related to gift cards. The impact of this change in estimate comprised $5.9 million included in Other revenue, partially offset by $0.6 million in gift card commission costs included in Selling, general, and administrative expenses on the Consolidated Statements of Operations.
(2) Other financing costs includes legal and other charges related to the refinancing of our Credit Facility in 2022.
We define EBITDA as net loss before interest expense, income taxes, and depreciation and amortization. Adjusted EBITDA and Adjusted loss per share-diluted are supplemental measures of our performance that are not required by or presented in accordance with GAAP. We believe these non-GAAP measures give the reader additional insight into the ongoing operational results of the Company, and are intended to supplement the presentation of the Company's financial results in accordance with GAAP. Adjusted EBITDA and adjusted loss per share-diluted exclude the impact of non-operating or nonrecurring items including changes in estimate, asset impairments, litigation contingencies, gains (losses) on debt extinguishment, restaurant and office closure costs, gains on sale leaseback transactions, severance and executive transition costs and other non-recurring, non-cash or discrete items; net of income tax impacts. Other companies may define these non-GAAP measures differently, and as a result may not be directly comparable to those of other companies. Adjusted loss per share-diluted and Adjusted EBITDA should be considered in addition to, and not as a substitute for, net loss as reported in accordance with U.S. GAAP as a measure of performance.
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The following table summarizes Income from Operations, and Restaurant Level Operating Profit for the fifty-three weeks ended December 31, 2023 and fifty-two weeks ended December 25, 2022:
Fifty-Three Weeks Ended Fifty-Two Weeks Ended
December 31, 2023 December 25, 2022
Income (loss) from operations $ 4,542 0.3% $ (57,497) (4.5)%
Less:
Franchise royalties, fees and other revenue 28,752 2.2% 35,345 2.8%
Add:
Other charges (gains), net (2,663) (0.2) 38,961 3.1
Pre-opening costs 587 — 568 —
Selling 34,770 2.7 51,700 4.1
General and administrative expenses 89,360 6.9 84,912 6.7
Depreciation and amortization 66,190 5.1 76,245 6.0
Restaurant level operating profit $ 164,034 $ 159,544
Income (loss) from operations as a percentage of total revenues 0.3% (4.5)%
Restaurant level operating profit margin (as a percentage of restaurant revenue) 12.9% 13.0%
The Company believes restaurant level operating profit is an important measure for management and investors because it is widely regarded in the restaurant industry as a useful metric by which to evaluate restaurant level operating efficiency and performance. The Company defines restaurant level operating profit to be income from operations less franchise royalties, fees and other revenue, plus other charges (gains), net, pre-opening costs, selling costs, general and administrative expenses, and depreciation and amortization. The measure includes restaurant level occupancy costs that include fixed rents, percentage rents, common area maintenance charges, real estate and personal property taxes, general liability insurance, and other property costs, but excludes depreciation and amortization expense, substantially all of which is related to restaurant level assets, because such expenses represent historical sunk costs which do not reflect current cash outlay for the restaurants. The measure also excludes costs associated with selling, general, and administrative functions, pre-opening costs, as well as, other charges (gains), net because these costs are non-operating or nonrecurring and therefore not related to the ongoing operations of its restaurants. Restaurant level operating profit is not a measurement determined in accordance with GAAP and should not be considered in isolation, or as an alternative, to income (loss) from operations as an indicator of financial performance. Restaurant level operating profit as presented may not be comparable to other similarly titled measures of other companies in the Company's industry.
Restaurant Data
The following table details restaurant unit data for our Company-owned and franchised locations for the periods indicated:
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Fifty-Three Weeks Ended Fifty-Two Weeks Ended
December 31, 2023 December 25, 2022
Company-owned:
Beginning of period 414 430
Opened during the period 1 —
Acquired from franchisees 5 —
Closed during the period (5) (16)
End of period 415 414
Franchised:
Beginning of period 97 101
Opened during the period — 1
Sold to Company during the period (5) —
Closed during the period (1) (5)
End of period 91 97
Total number of restaurants 506 511
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The following table presents total Company-owned and franchised restaurants by state or province as of December 31, 2023:
Company-Owned Restaurants Franchised Restaurants
State:
Arkansas 2 1
Alaska 3
Alabama 4
Arizona 18 1
California 57
Colorado 22
Connecticut 3
Delaware 5
Florida 17
Georgia 6
Iowa 5
Idaho 8
Illinois 20
Indiana 11
Kansas 5
Kentucky 4
Louisiana 1
Massachusetts 5
Maryland 11
Maine 2
Michigan 19
Minnesota 4
Missouri 8 3
Montana 1
North Carolina 17
Nebraska 4
New Hampshire 3
New Jersey 11 1
New Mexico 3
Nevada 6
New York 14
Ohio 16 2
Oklahoma 5
Oregon 15 5
Pennsylvania 11 20
Rhode Island 1
South Carolina 4
South Dakota 1
Tennessee 9
Texas 18 9
Utah 1 5
Virginia 20
Washington 37
Wisconsin 11
Province:
British Columbia 11
Total 415 91
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Results of Operations
Operating results for each fiscal period presented below are expressed as a percentage of total revenues, except for the components of restaurant operating costs, which are expressed as a percentage of restaurant revenue. Certain percentage amounts in the table below do not total due to rounding as well as restaurant operating costs being expressed as a percentage of restaurant revenue and not total revenues.
Year Ended
December 31, 2023 December 25, 2022
Revenues:
Restaurant revenue 97.8 % 97.2 %
Franchise revenue 1.2 1.5
Other revenue 1.0 1.3
Total revenues 100.0 % 100.0 %
Costs and expenses:
Restaurant operating costs (1) (excluding depreciation and amortization shown separately below):
Cost of sales 24.2 % 24.9 %
Labor 37.2 35.8
Other operating 17.7 18.3
Occupancy 8.1 8.0
Total restaurant operating costs 87.2 87.0
Depreciation and amortization 5.1 6.0
Selling, general, and administrative expenses 9.5 10.8
Pre-opening costs — —
Other charges (gains), net (0.2) 3.1
Income (loss) from operations 0.3 % (4.5) %
Other expense (income):
Interest expense 2.0 % 1.6 %
Interest (income) and other, net (0.1) —
Total other expenses, net 2.0 1.6
Loss before income taxes (1.6) (6.2)
Income tax expense (benefit) 0.0 0.1
Net loss (1.6) % (6.2) %
(1) Expressed as a percentage of restaurant revenue.
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Revenues
Year Ended
(Revenues in thousands) 2023 2022 Percent Change
Restaurant revenue $ 1,274,294 $ 1,230,189 3.6 %
Franchise revenue 15,867 19,306 (17.8) %
Other revenue 12,885 16,039 (19.7) %
Total revenues $ 1,303,046 $ 1,265,534 3.0 %
Average weekly net sales volumes in Company-owned restaurants $ 59,454 $ 55,852 6.4 %
Total operating weeks 21,643 22,028 (1.7) %
Restaurant revenue, which comprises primarily food and beverage sales, increased $44.1 million in 2023, or 3.6%, as compared to 2022. The fifty-third week in 2023 contributed approximately $24.5 million in restaurant revenue. Of the remaining $19.6 million increase, $18.8 million, or 1.6%, was due to an increase in comparable restaurant revenue and the remaining $0.7 million increase was due to non-comparable restaurants, primarily attributed to the Company's purchase of five restaurants from a Franchisee in the second quarter of fiscal year 2023. The comparable restaurant revenue increase was driven by a 6.8% increase in average Guest check with a 5.2% decrease in Guest count. The increase in average Guest check resulted from a 7.5% increase in menu pricing and 0.9% decrease in discounts, partially offset by a 1.6% decrease in menu mix. The decrease in menu mix was primarily driven by Guests shifting visits from third party delivery platforms with elevated menu prices, to dine in visits at standard menu prices, and the removal of low Guest preference, but higher priced burger options. Dine-in sales comprised 75.0% of total food and beverage sales in 2023, as compared to 71.3% in 2022.
Average weekly net sales volumes represent the total restaurant revenue for all Company-owned Red Robin restaurants for each time period presented, divided by the number of operating weeks in the period. Comparable restaurant revenues include those restaurants that are in the comparable base based on operating five full fiscal quarters as of the end of each period presented. Closed Company-owned restaurants were not included in the comparable base for the fiscal years ended December 31, 2023 and December 25, 2022. Fluctuations in average weekly net sales volumes for Company-owned restaurants reflect the effect of comparable restaurant revenue changes as well as the performance of new restaurants during the period.
Franchise revenue primarily includes royalty income and advertising fund contributions. Franchise revenue decreased $3.4 million, or 17.8%, in 2023 compared to 2022. Franchise revenue declined primarily due to a reduction in the percentage of sales each franchisee is required to contribute to support selling activities. This reduction results from an increased focus on local restaurant marketing and reduced national and/or mass media channels pursuant to our North Star strategy. The percentage of sales each franchisee is required to contribute could change in the future, as we expect to align contributions with spending levels, subject to compliance with the respective franchise agreement.
Other revenue primarily comprises gift card breakage, which represents the value associated with the portion of gift cards sold that are unlikely to be redeemed, licensing income, and recycling income. During 2023 and 2022, we recognized $9.9 million and $13.8 million of gift card breakage.
Cost of Sales
(In thousands, except percentages) 2023 2022 Percent Change
Cost of sales $ 308,962 $ 306,509 0.8 %
As a percent of restaurant revenue 24.2 % 24.9 % (0.7) %
Cost of sales, which comprises food and beverage costs, is variable and generally fluctuates with sales volume. Cost of sales as a percentage of restaurant revenue decreased 70 basis points in 2023 as compared to 2022. The decrease was primarily driven by menu price increases and implementation of various cost savings initiatives, partially offset by commodity inflation and investments to enhance food quality.
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Labor
(In thousands, except percentages) 2023 2022 Percent Change
Labor $ 473,538 $ 440,564 7.5 %
As a percent of restaurant revenue 37.2 % 35.8 % 1.4 %
Labor costs include restaurant-level hourly wages and management salaries as well as related taxes and benefits. Labor as a percentage of restaurant revenue increased 140 basis points in 2023 as compared to 2022. The increase was primarily driven by investments in hourly labor, management labor, and related payroll taxes. Additionally, incentive compensation expense increased due to increased achievement of incentive targets, partially offset by lower group insurance expense. In 2023, we made investments in management and hourly labor to support an enhanced Guest experience, with an objective to drive increases in Guest traffic count over time, resulting in an increase in restaurant profitability.
Other Operating
(In thousands, except percentages) 2023 2022 Percent Change
Other operating $ 224,999 $ 224,704 0.1 %
As a percent of restaurant revenue 17.7 % 18.3 % (0.6) %
Other operating costs include costs such as equipment repairs and maintenance costs, restaurant supplies, utilities, restaurant technology, and other miscellaneous costs. Other operating costs as a percentage of restaurant revenue decreased 60 basis points compared to the same period in 2022. The decrease was primarily driven by reduced third party commission expenses associated with lower off-premises mix and lower commission rates, and reduced restaurant supply costs primarily due to various cost saving initiatives, partially offset by higher repairs and maintenance costs.
Occupancy
(In thousands, except percentages) 2023 2022 Percent Change
Occupancy $ 102,761 $ 98,868 3.9 %
As a percent of restaurant revenue 8.1 % 8.0 % 0.1 %
Occupancy costs include fixed rents, property taxes, common area maintenance charges, general liability insurance, contingent rents, and other property costs. In 2023, occupancy costs increased $3.9 million or 10 basis points as a percentage of revenue compared to 2022. This increase is primarily driven by an increase in fixed rents related to the sale-leaseback of 18 locations and the acquisition of five restaurants from a franchisee, mostly offset by reduced expenses related to net Company-owned restaurant closures.
Depreciation and Amortization
(In thousands, except percentages) 2023 2022 Percent Change
Depreciation and amortization $ 66,190 $ 76,245 (13.2) %
As a percent of total revenues 5.1 % 6.0 % (0.9) %
Depreciation and amortization includes depreciation on capital expenditures for restaurants and corporate assets as well as amortization of reacquired franchise rights, leasehold interests, and certain liquor licenses. In 2023, depreciation and amortization expense as a percentage of revenue decreased 90 basis points as compared to 2022. The decrease is primarily due to asset impairments and disposals reducing the depreciable asset base.
Selling, General, and Administrative expenses
(In thousands, except percentages) 2023 2022 Percent Change
Selling, general, and administrative expenses $ 124,130 $ 136,612 (9.1) %
As a percent of total revenues 9.5 % 10.8 % (1.3) %
Selling, general, and administrative costs include all corporate and administrative functions. Components of this category include marketing and advertising costs, our Restaurant Support Center, regional, and franchise support salaries and benefits; travel; professional and consulting fees; corporate information systems; legal expenses; office rent; training; and Board of Directors' expenses. Selling, general, and administrative expense decreased $12.5 million, or 9.1% in 2023 as compared to 2022.
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General and administrative expenses increased $4.4 million or 5.2% in 2023 as compared to 2022. The increase in 2023 was primarily driven by higher incentive compensation, increased travel, and lower capitalized costs due to fewer eligible capital projects, partially offset by a decrease in wages and stock compensation due to a reduction in force in the fourth quarter of fiscal 2022 and executive transitions in fiscal years 2022 and 2023.
Selling expenses decreased $16.9 million or 32.7% in 2023 as compared to 2022. The decrease resulted from a strategic shift as part of the North Star Plan to reallocate dollars from selling expenses to support investments in the Guest experience. The reductions in selling expenses were primarily in internet and local media.
Pre-opening Costs
(In thousands, except percentages) 2023 2022 Percent Change
Pre-opening costs $ 587 $ 568 3.3 %
As a percent of total revenues — % — % — %
Pre-opening costs, which are expensed as incurred, comprise the costs related to preparing restaurants to introduce Donatos ® and other initiatives, as well as direct costs, including labor, occupancy, training, and marketing, incurred related to opening new restaurants and hiring the initial work force. Our pre-opening costs fluctuate from period to period, depending upon, but not limited to, the number of restaurants where Donatos ® has been introduced, the number of restaurant openings, the size of the restaurants being opened, and the location of the restaurants. Pre-opening costs for any period will typically include expenses associated with restaurants opened during the period as well as expenses related to restaurants opening in subsequent periods.
Pre-opening costs increased due to one new restaurant opening in 2023 as compared to none in 2022 mostly offset by a decrease due to 26 Donatos ® installations in 2023 as compared to 52 Donatos ® installations in 2022.
Other Charges (Gains), net
(In thousands, except percentages) 2023 2022 Percent Change
Asset impairment $ 9,130 $ 38,534 (76.3) %
Gain on sale of restaurant property, net of expenses (29,543) (9,204) *
Severance and executive transition, net of $128 and $3,299 in stock-based compensation
3,419 2,280 50.0 %
Other financing costs — 1,462 (100.0) %
Restaurant closure costs, net 3,062 828 *
Closed corporate office costs, net of sublease income 416 475 (12.4) %
Litigation contingencies 9,140 4,148 *
Asset disposal and other 1,713 438 *
Other charges (gains), net $ (2,663) $ 38,961
* Percentage increases and decreases over 100 percent were not considered meaningful.
For further information on Other charges (gains) line items, refer to Note 4. Other Charges (Gains), net, of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Interest Expense and Interest Income
Interest expense in 2023 and 2022 was $26.6 million and $20.6 million, respectively. The $5.9 million increase was due to higher weighted average interest rates. Our weighted average interest rate in 2023 and 2022 was 12.7% and 9.1%, respectively. Average outstanding debt in 2023 and 2022 was $205.6 million and $200.8 million, respectively.
Interest income and other increased by $1.1 million in 2023 due to investment changes related to a deferred compensation plan for which assets are held in a rabbi trust, along with higher interest income on bank account balances in the 53-week period.
Income Taxes
Income tax provision was $0.3 million in 2023, compared to an income tax provision of $0.7 million in 2022. Our effective tax rate was a 1.5% provision in 2023 and a 1.0% provision in 2022, reflecting minimum state income taxes and state franchise taxes despite a pretax net loss position.
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Liquidity and Capital Resources
Cash and cash equivalents, and restricted cash decreased $26.6 million to $31.6 million at December 31, 2023, from $58.2 million at the beginning of the fiscal year. Approximately $17.2 million of the decline is due to the timing of our payroll cycle which occurred in the 53rd fiscal week and, as a result, was recorded as a cash outflow in the 2023 fiscal year.
The Company is using available cash flow from operations to maintain existing restaurants and infrastructure, and execute on its long-term strategic initiatives. As of December 31, 2023, the Company had approximately $48.6 million in liquidity, including cash and cash equivalents and $25.0 million available borrowing capacity under its Credit Facility.
Cash Flows
The table below summarizes our cash flows from operating, investing, and financing activities for each fiscal year presented (in thousands):
Year Ended
2023 2022
Net cash provided by (used in) operating activities $ (1,157) $ 35,532
Net cash provided by (used in) investing activities 8,226 (29,568)
Net cash provided by (used in) financing activities (33,712) 29,533
Effect of exchange rate changes on cash 2 (41)
Net change in cash and cash equivalents, and restricted cash $ (26,641) $ 35,456
Operating Cash Flows
Net cash flows provided by operating activities decreased $36.7 million to $1.2 million in 2023 as compared to 2022. The change in net cash provided by operating activities is primarily attributable to the timing of payroll as a result of the 53rd week discussed above, the receipt of an income tax refund of $14.6 million in 2022, and severance payments and higher interest payments in 2023.
Investing Cash Flows
Net cash flows provided by investing activities increased $37.8 million to $8.2 million in 2023 as compared to 2022. The increase in cash flows provided by investing activities is primarily due to proceeds from sale-leaseback transactions and a sale of real estate, partially offset by increased capital expenditures and the acquisition of five franchised restaurants.
The following table lists the components of our capital expenditures for each fiscal year presented (in thousands):
Year Ended
2023 2022
Restaurant improvement capital and other $ 22,160 $ 15,882
Investment in technology, infrastructure, and other 16,778 12,303
Donatos ® expansion
8,620 6,054
New restaurants and restaurant refreshes 1,882 3,920
Total capital expenditures $ 49,440 $ 38,159
Restaurant improvement capital and other consists of capital equipment for our restaurants. Investment in technology, infrastructure and other consists of capital costs related to restaurant technology assets, capital overhead, and other centrally developed assets. Expenditures for Donatos ® expansion include expenditures for kitchen equipment, other equipment and other capital costs associated with adding Donatos ® to our restaurants.
Financing Cash Flows
Net cash flows used in financing activities increased $63.2 million to $33.7 million in 2023 as compared to 2022.
In 2022, financing activities were a source of cash, due to net draws made on long-term debt as a result of the Company's refinancing of debt on March 4, 2022. In 2023, the use of cash resulted primarily from the Company’s repayment of outstanding debt with proceeds from the sale-leaseback transaction, $10.0 million of share repurchases, and standard principal payments due under the terms of the Company’s Credit Agreement.
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Credit Facility
On March 4, 2022, the Company replaced its prior amended and restated Credit Agreement (the "Prior Credit Agreement") with a new Credit Agreement (the "Credit Agreement"), which provides for a new Senior Secured Term Loan and Revolving Credit Facility (the “Credit Facility”). The Credit Agreement's interest rate references the Secured Overnight Financing Rate ("SOFR"), a new index calculated by short-term repurchase agreements and backed by U.S. Treasury securities, or the Alternate Base Rate ("ABR"), which represents the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.5% per annum, or (c) one-month term SOFR plus 1.0% per annum.
As of December 31, 2023, the Company had outstanding borrowings under the Credit Facility of $182.6 million net of $6.5 million of unamortized deferred financing charges and discounts, none of which was classified as current. As of December 31, 2023, the Company had $25.0 million of available borrowing capacity under its Credit Facility, and $7.7 million letters of credit issued against cash collateral. The Company's cash collateral is recorded in Restricted cash on our Consolidated Balance Sheets.
For additional information regarding our Credit Facility, see Note 8. Borrowings included within the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Covenants
We are subject to a number of customary covenants under our Credit Facility, including limitations on additional borrowings, acquisitions, stock repurchases, sales of assets, and dividend payments, as well as a Total Net Leverage ratio covenant. As of December 31, 2023, we were in compliance with all debt covenants.
Debt Outstanding
Total debt outstanding decreased $25.7 million to $189.1 million at December 31, 2023, from $214.9 million at December 25, 2022, primarily driven by payments of long-term debt using proceeds from the sale-leaseback transactions during the fifty-three weeks ended December 31, 2023.
Share Repurchase
On August 9, 2018, the Company's Board of Directors authorized the Company's current share repurchase program of up to a total of $75 million of the Company's common stock. The share repurchase authorization will terminate upon completing repurchases of $75 million of common stock unless otherwise terminated by the board. Pursuant to the repurchase program, purchases may be made from time to time at the Company's discretion and the Company is not obligated to acquire any particular amount of common stock. From the date of the current program approval through December 31, 2023, we have repurchased a total of 1,088,588 shares at an average price of $15.18 per share for an aggregate amount of $16.5 million. The Company completed $10.0 million of share repurchases in 2023 and no share repurchases during 2022. Accordingly, as of December 31, 2023, we had $58.4 million of availability under the current share repurchase program. Our Credit Agreement limits our ability to repurchase shares to certain conditions set forth by the lenders in the Credit Facility.
Contractual Obligations
The following table summarizes the amounts of payments due under specified contractual obligations as of December 31, 2023 (in thousands):
Payments Due by Period
Total 2024 2025 - 2026 2027 - 2028 Thereafter
Long-term debt obligations (1)
$ 278,312 $ 22,292 $ 44,585 $ 211,435 $ —
Finance lease obligations (2)
10,784 1,386 2,815 2,451 4,132
Operating lease obligations (3)
619,896 82,310 153,136 126,940 257,510
Purchase obligations (4)
230,683 61,464 95,328 49,813 24,078
Other non-current liabilities (5)
1,903 360 142 74 1,327
Total contractual obligations $ 1,141,578 $ 167,812 $ 296,006 $ 390,713 $ 287,047
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(1) Long-term debt obligations primarily represent minimum required principal payments under our existing Credit Agreement as of December 31, 2023, including estimated interest of $89.2 million based on a 11.62% average borrowing interest rate.
(2) Finance lease obligations include interest of $2.1 million.
(3) Operating lease obligations exclude variable lease costs, such as sales based contingent rent, and include interest of $192.6 million.
(4) Purchase obligations primarily include the Company's share of expected system-wide fixed price commitments for food, beverage, and restaurant supply items. The timing of amounts presented is estimated based on anticipated inventory needed for the Company’s restaurants and could vary due to changes in anticipated traffic counts, consumer preferences, or other factors.
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(5) Other non-current liabilities primarily represent the employee deferred compensation plan liability.
Financial Condition and Future Liquidity
We require capital principally to maintain, improve, and refurbish existing restaurants; build new restaurants; support infrastructure needs; fund operational changes; and for general operating purposes. We are required to make interest and principal payments under the terms of our Credit Agreement, and may use capital to pay additional principal on our borrowings or repurchase our common stock as allowed by our Credit Agreement. Our primary short-term and long-term sources of liquidity are expected to be cash flows from operations and our Credit Facility. We expect cash flows from operations and available borrowing capacity under the Credit Facility will be sufficient to meet debt service, capital expenditures, and working capital requirements for at least the next twelve months. The Company is working to complete a third sale-leaseback transaction related to its owned properties and if completed, anticipates proceeds will be used to repay debt. We and the restaurant industry in general maintain relatively low levels of accounts receivable and inventories, and vendors generally grant short-term trade credit for purchases, such as food and supplies. The addition of new restaurants and refurbishment of existing restaurants are reflected as long-term assets and not as part of working capital.
Working Capital
We typically maintain current liabilities in excess of our current assets which results in a working capital deficit. We are able to operate with a working capital deficit because restaurant sales are primarily conducted on a cash or credit card basis. Rapid turnover of inventory results in limited investment in inventories, and cash from sales is usually received before related payables for food, supplies, and payroll become due. In addition, receipts from the sale of gift cards are received well in advance of related redemptions. Rather than maintain higher cash balances that would result from this pattern of operating cash flows, we typically utilize operating cash flows in excess of those required for currently maturing liabilities to pay for capital expenditures, debt repayment, or to repurchase stock. When necessary, we utilize our Credit Facility to satisfy short-term liquidity requirements. We believe our future cash flows generated from restaurant operations combined with our remaining borrowing capacity under the Credit Facility and sale-leaseback transactions will be sufficient to satisfy any working capital deficits and our planned capital expenditures.
Critical Accounting Estimates
Critical accounting estimates are those we believe are both significant and that require us to make difficult, subjective, or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors we believe to be appropriate under the circumstances. Actual results may differ from these estimates, including our estimates of future restaurant-level cash flows, which are subject to the current economic environment, and we might obtain different results if we use different assumptions or conditions. We have identified the following as the Company's most critical accounting estimates, which are most important to the portrayal of the Company's financial condition and results and require management's most subjective and complex judgment. Information regarding the Company's other significant accounting policies is disclosed in Note 1, Description of Business and Summary of Significant Accounting Policies , of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Impairment of Long-Lived Assets - Long-lived assets, including restaurant sites, leasehold improvements, other fixed assets, right of use assets, and amortizable intangible assets are reviewed when indicators of impairment are present. Expected cash flows associated with an asset are the key factor in determining the recoverability of the asset. Identifiable cash flows are measured at the restaurant-level. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance, including assumptions on future revenue trends. Management's estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, changes in economic conditions, changes to our business model, or changes in operating performance. If the sum of the undiscounted cash flows is less than the carrying value of the asset, we recognize an impairment loss. The amount of the impairment loss is measured as the amount by which the carrying value exceeds the fair value of the asset, which is determined using discounted cash flows.
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Judgments made by management related to our ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as changes in economic conditions, changes in operating performance, and the ongoing maintenance and improvements of the assets. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause us to realize a material impairment charge. Each restaurant's past and present operating performance were reviewed in combination with projected future results, primarily through projected undiscounted cash flows, which indicated possible impairment. For those restaurants for which undiscounted cash flows did not exceed their carrying value, we compared the carrying amount of each restaurant to its fair value as estimated by management. Determining the fair value of the long-lived assets requires the use of estimates and assumptions and is typically determined using a discounted cash flow projection model. The weighted average cost of capital discount factor is determined using external information such as the risk-free rate of return, industry beta factors, and premium adjustments. Management uses other market information such as market rent and discount rates, which are subject to judgment, to estimate the fair value of restaurant right of use lease assets. During 2023, the Company recognized non-cash impairment charges of $9.1 million, primarily related to the impairment of the long-lived assets at 19 underperforming locations and quota state liquor licenses at three locations. During 2022, the Company recognized non-cash impairment charges of $38.5 million, primarily related to impairments of long-lived assets at 46 underperforming locations and quota state liquor licenses at six locations.
Information technology systems, such as internal-use computer software, are reviewed and tested for recoverability if the internal-use computer software is not expected to provide substantive service potential, a significant change occurs to the extent or manner in which the software is used or is expected to be used, a significant change is made or will be made to the software program, or costs of developing or modifying internal-use software significantly exceed the amount originally expected to develop or modify the software.
Liquor licenses with indefinite lives are reviewed for impairment annually or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the fair value. We determine fair value based on quoted prices in the active market for the license in the same or similar jurisdictions, representing a level 1 fair value measurement.
Recently Issued Accounting Standards
See Note 2. Recent Accounting Pronouncements, of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for our discussion of recently issued accounting standards.
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